Gender Diversity and Firm Performance: UK Companies

Chapter 1 Introduction

            Women representation and involvement in the business sector has anchored a lot of debate in the recent past. Several scholars such as Joek, Pull, and Vetter, 2013 have stood up to reignite the power of gender diversity and balance within the boardrooms. Some hold the view that women are under-represented in the business boardrooms yet their contribution is impactful. Women involvement in business opens up an opportunity for more skills, which strengthens the firm’s competitiveness. It is due to this reason that firms have adjusted themselves to embrace gender diversity in all their business departments. This was further fueled by the corporate governance scandals witnessed in Eron and WorldCom in the United States.

            On the other hand, the government has not been left behind in drumming up support for the gender diversity in the business sector. The government has restructured the board composition to widen the percentage of women in the boardrooms. Examples of the government reforms on board restructuring include the 2017 Hampton Alexander report by the UK government recommending 33% female representation in the Financial Times Stock Exchange 100. The UK government advised FTSE 100 to have at least 33% women representation within their boardrooms by 2020.  

            However, the UK government is not forcing companies to embrace gender diversity increase the number of women within the board. Instead, they are using voluntary approach in order to allow companies to take women that are more competent as opposed to quota approach, which may force companies to take inexperience women just to fill the gap. Surprisingly, the number of woman has increased steadily over the years. FTSE 100 firms have witnessed the involvement of women within their boardrooms over the past 10 years. From this statistics therefore, this research work will go deep into the FTSE 100 and demonstrate the impact of increased women representation in FTSE 100. The 2017 female FTSE Board report indicated that at least 28 FTSE companies had obtained a target of 33% in their board structure. Therefore, this study will seek to demonstrate whether the widen percentage of women in the list of directors has impacted the companies in any way.  

            This research work looks into how integration of women in the boardroom will shape the growth of the firm. In executing this, this research will utilize the case study of FTSE 100 companies in the UK. Notably, the findings indicate that there is positive and improved performance when firms embrace gender diversity. Additionally, owing to critical mass theory, the number of women in the board is also a factor when defining the success of the firm.

            The findings of this study contribute a lot to the existing literature on similar topic. Firstly, it demonstrates how diversity in board boosts the performance of the firm.  Moreover, it also informs other stakeholders that a board should have at least three women in order to be effective. This contributes further to critical mass theory.

            Chapter 2. Literature Review    

            The discussion on gender diversity and business performance has drawn a lot of attention from various stakeholders and scholars. This heavy topic has seen several individuals digging deep trying to practically demonstrate the connection between gender diversity and business growth. Various theories have been put forward to explain a relationship between gender diversity and organizational performance. Some of these theories include resource dependency theory, which looks into the skills of the employees, the human capital theory which touches on the competency of the employee, agency theory which analyzes conflict between stakeholders, social psychology theory, critical mass theory which looks into the number factor in gender diversity and many more. All the theories looks into the gender factor in relation to boardroom. They try to explain the impact of women in corporate boardrooms.

            According to resource dependency theory, organizations and firm eye on the employees that best suit their resources profile.  The organizational resource profile reflects the kind of employees that the firm will be attracted to. Additionally, apart from the resource profile, organizations also get attracted to skilled employees who will contribute to more to the organization. Moreover, this theory also believes that gender diversity and board size are contributing factors in the external environment.  This theory holds the view that gender diversity increases the chances for the firm to retain enough human resources. The more diversified the company is in terms of gender, the more they get access to counsel and advise from the board.  Therefore, firms should work to ensure that they recruit diversified, competent and experience board that will bring meaningful success to the firm.

            Notably, for the case of UK, the research done by Singh, Terjesea, and Vinnicombe dated 2008, indicates that close to a quarter of the women recruited to the FTSE 100 board between 2001 and 2004 had previous experience having worked as directors while others had experience about financial institutions (Singh, Terjesen, & Vinnicombe, 2008). Surprisingly, women were more experienced than their male counterparts were. Most men had engineering experience as most of them were from engineering related field. Additionally, Singh, Terjesea, and Vinnicombe indicated that more than a quarter of the women recruited to the FTSE 100 had leadership experience as most of them had previously occupied leadership positions in various public institutions while others had previously headed private institutions.

            Human capital theory was postulated by Becker and documented in 1964. Becker’s theory touches on the skills, education level and experience of an individual. It tries to portray the aspect of competency among the employees in growing the firm. Human capital is a factor that shapes the performance of the firm. According to Singh, Terjesea, and Vinnicombe, women with degrees from universities are more productive to the firm. The more educated the women are, the more productive they are to the organization. Similarly, the same scholars also pointed out that more women have Masters Degrees and international experience in the aspect of FTSE 100 companies.

            Moreover, according to research done by Davies published in 2011, women from United States and Europe makes up 60% of the university graduates. On similar account, women add up to 55% of the total graduates in UK. The same women also make up to 42% of the total workforce in UK (Davies, 2011). Notably, based on these statistics, it would be easy to draw a hypothesis that gender diversification in FTSE 100 companies will increase human capital and thus boost performance within the firm.

            On the other hand, the Agency theory looks into the battle between the investors and the firm’s management. Additionally, this theory goes ahead to define the role of board in resolving conflict between the two parties. Notably, the more diversified the board is, the more efficient it is to monitor the conflict between the shareholders and the management. According to gender agency drawn by Adams and Ferreira in 2009, there is a connection between gender diversity and conflict management. The outcome of the research indicated that women have more monitoring abilities as they are able to think independently.  The research also indicate that with gender diversity, the managerial performance is increased because women attend meeting regularly and thus the accountability of the CEO is improved (Adams & Ferreira, 2009).

            The Social psychological theory looks into the psychological adjustment that position women on a higher position. Female directors in 1980s and 1990s in UK were likely to have a title as compared to their male counterparts (Sealy, Singh and Vinnicombe, 2007).  However, gender diversity widens the extend of action plan by the top management. As a way of demonstrating this, the above researchers compare a family controlled company with public limited company. They stated that family controlled companies with women are more difficult to manage because a lot friction will emerge. Therefore, their conclusion was that, the same problems would be transferred to public companies when women are given more positions to join the board.

            The Token theory supports the stereotype that women are less qualified to occupy board positions. The theory stipulates that most women lack the necessary skills to fill the director’s position.  However, Kanter stated that the tokenism problem can be resolved by obeying the provision of the critical mass theory. The more the number of women in the  directors’ list, the more the tokenism fades. The token factor emerge as a result of reduced number of women. Similarly, Konrad and Kramer stated that dynamism in the boardroom is achieved when there are three or more women. Two or more women neutralize the idea of tokenism. The more the number of women in the corporate boardroom, the more effective the board is. Women will act independently and thus boost the effectiveness of the boardroom.

            The performance of the firm is improved further when the board has 30% or more women (Joecks et al 2013). According to Joecks, three is a magic number that transforms the efficiency of the board. Women performed better when their number is increased. The strength, influence, and power of the women increase with their number (Joecks, Pull, & Vetter, 2013).

Chapter 3 Research Methods

            The sample of the research narrows down to FTSE 100 companies within UK. The publicly listed companies within FTSE 100 firms will be evaluated for study.  This research work seek to answer questions pertaining gender and the progress of the organization, gender education and organizational progress, gender number and organizational progress, firm characteristics and its progress, and many more. Therefore, the research method will seek to narrow down into analyzing these questions.

             The research will analyze all the economic indicators of the firm in relation to gender diversity. That is to say, the ROA and Tobin Q will be evaluated before and after appointment of the female directors to FTSE 100 boardrooms. ROA and Tobin Q are used purposely to give the insight of the firm performance. In this study, the Tobin Q presents the measure of the market performance whereas ROA outlines the account situation of the firm. A firm with Tobin Q at one presents positive results about the firm and that the investors are confident about the performance and the growth of the firm. Tobin Q at one shows that the firm is progressing well and that it is performing well in the market. The opposite is true for the case of a firm with Tobin Q value being less than one. The confidence of the investors goes down and the growth of the firm is slowed down. This lowers the confidence of the investors. On the other hand, ROA is obtained by calculating the ratio to average of the total assets used for operation in one financial year. RAO compares the assets value of the firm and the annual performance. Notably, unlike net income, ROA present more detailed information about the firm. It gives information about the firm’s size thus enabling one to easily compare one firm relative to the other. With ROA, one will be able to tell whether the assets of the firm are efficiently fueling its growth.

            As a way of pointing out the effect of female directors on the firm, the study will be conducted before and after appointment of female directors. The firm will be evaluated to determine its RAO as well as the Tobin Q for every year before the women directors resume office and 1 year after their resumption of office. However, in order to obtain more accurate results, the same company evaluation is repeated for 2 to 3 years. The evaluation is repeated in order to see if the results of the previous year is consistent with that of the current. From there comparison will be made and thus relevant conclusion will be drawn.

            The variables of the study are also measured. The main variable in this study is the gender diversity. At this point, the mass theory will come into play. By application of the mass theory, the number of women appointed to the boardroom will be measured. The mass theory is concern about the number of women appointed to the boar and its impact on the performance of the firm. These numbers are very important, as they will be used to underscore weather the number of women in the boardroom is also a factor in determining performance of the firm. The measurement will take a zero if the firm does not have any female director on the board. Additionally, education level is also another factor that will be measured among the female directors within FTSE 100 firms. The education measurement will be abbreviated as 1 if the person in question has a bachelor degree, masters or even the PhD. However, it will take a zero if there will be no education level. This study want to identify whether the education level among the female directors contribute towards firm’s performance.

            Similarly, the variables on firm’s characteristics are also noted. Some of these characteristics include, firm size, age of the firm, debt ratio of the firm, and many more. The size of the firm will be obtained by looking at the market of the firm. Age of the organization will obtained by looking at the age provided in the company profile because this study aims to evaluate publicly listed companies only. On the other hand, the debt ratio is obtained by looking at the ratio of the debt of the organization to its size. This will reflect weather debt is proportional to the firm size. This will weigh to see which is bigger between debt and the firm. Debt ratio will also present information on whether the firm is in a position to settle the debt.    Notably, the crisis factor is also included in the study in order to take care of the economic crisis such as the 2007-2009 global financial crisis. The crisis factor is set specifically to excuse the years of global financial crisis from critical analysis. This will enable one to use a different angle of analysis when comparing performance of the firm within two different financial years. That is financial years where one is under 2007-2009 and a year outside the same bracket.

                                                                     References

Singh, V., Terjesen, S., & Vinnicombe, S. (2008). Newly appointed directors in the boardroom:: How do women and men differ?. European management journal26(1), 48-58.

Davies, M. (2011). Women on boards.

Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The Journal of Law and Economics, 26(2), 327–349.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.

Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94, 291–309.           

Joecks, J., Pull, K., & Vetter, K. (2013). Gender diversity in the  boardroom and firm performance: What exactly constitutes a  “critical mass”? Journal of Business Ethics, 118, 61–72.

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